If you’ve been reading Homeiown for a while, you know I don’t usually do the news here - simply because it doesn’t make any sense to re-publish stuff other websites are full of. This time, when they announced the third successive interest rate cut, I made an exception, because I want to explain what it means to the home buyers and the home owners.

If you have no idea what interest rate is, read this paragraph, but if you do - skip and go to the next one. Interest rate is the percentage rate paid on your bank savings account, it is also the percentage rate charged on a loan - such as mortgage. The way things work is that Federal Reserve Bank sets the global interest rate nation-wide and then each bank changes their rates according to the global interest rate. For example, if the global rate moves up - the earnings on your savings account will probably increase, but if you are paying a mortgage at variable rate - you will also start paying more.

A bit of background: the interest rate earlier this year was cut 2 times and this is the third time. Its peak was at 7.25% in September. The first cut was of 0.25 %, then 1% and now the last cut was 0.75 %. It looks like such a small figure - I mean what’s a 0.75 percent, right? WRONG!

If we compare how much a household with a 300,000 mortgage will pay now to what they were paying 2 months ago, we’ll see that they save $390 monthly, which means $4680 annually.

These figures will give you a good idea of how much you save on a mortgage:

• On a mortgage of 200K the monthly repayment before the cut was $1660, after the cut you save $260 a month, $3120 a year.
• On a mortgage of 300K the monthly repayment before the cut was $2490, after the cut you save $390 a month, $4680 a year.
• On a mortgage of 400K the monthly repayment before the cut was $3320, after the cut you save $520 a month, $6240 a year.
• On a mortgage of 500K the monthly repayment before the cut was $4150, after the cut you save $650 a month, $7800 a year.

This piece of news affects us all - people who own a house, people who think of buying a house and even people who are starting to build their own house, because all the loans are affected by interest rate change - now we can borrow money for less. Add to that the new FHOG and we are in a much better position than we were 2 months ago.

And now to the bigger picture - the reasons for this third interest rates cut was to avoid recession. I am sure you have heard about the global economy slowdown, some countries are doing better, some are worse and our government is trying to make sure Australia doesn’t go into recession, which would mean job losses for a lot of people, financial stress, etc. If our country was a train, speeding towards recession, then interest rate would be a break they use - so that we would only go into a slowdown, which is unavoidable anyway, but not into recession.

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